Three parties are involved. You sell the invoices, your customer owes the money and the factor buys the right to collect it. Because the factor relies on your customers paying, it checks their credit as well as yours, and the cash you can raise grows with your sales.
In the UK, factoring and invoice discounting are both forms of invoice finance. Selective or spot factoring finances single invoices, while whole turnover factoring covers your entire sales ledger.
How invoice factoring works
- The factor reviews your business and your customers and agrees a funding limit.
- You deliver and invoice as usual, then assign the invoice to the factor. In disclosed factoring, the invoice tells the customer to pay the factor.
- The factor pays you an advance, an agreed percentage of the invoice value.
- The customer pays the factor. In full-service factoring, the factor also sends reminders and chases late payers.
- The factor pays you the rest, minus its fees. If the customer never pays, the agreement decides who takes the loss.
Recourse and non-recourse factoring
With recourse factoring, you keep the risk that a customer does not pay. If an invoice stays unpaid past a period set in the agreement, you repay the advance on it.
With non-recourse factoring, the factor takes the credit risk on approved customers, up to the limit it set for each one. It costs more, and the cover may be limited to customer insolvency, so check whether disputed invoices and slow payment are included.
Recourse also decides how factoring shows in your accounts. Under IFRS 9, invoices stay on your balance sheet if you keep substantially all the risks and rewards of owning them, and the advance is then shown as a liability (paragraphs 3.2.6 and 3.2.15). With full recourse that is the usual outcome, while US GAAP (ASC 860) asks instead whether you have given up control of the invoices. Invoices that leave the balance sheet lower your days sales outstanding, although customers pay no faster.
Factoring vs invoice discounting
Both advance cash against unpaid invoices. The difference is who collects the money and whether your customers know.
| Feature | Factoring | Invoice discounting |
|---|---|---|
| Who runs the sales ledger and chases customers | The factor | You |
| Do customers know | Yes, they pay the factor | Usually not |
| Service fees | Higher, since the factor does the collection work | Lower |
Reverse factoring, also called supply chain finance, is set up by a large buyer rather than the seller. The factor pays the buyer's suppliers early at a discount based on the buyer's credit, and the buyer pays the factor on the original due date.
What invoice factoring costs
Factors usually charge a service fee, set as a percentage of the invoices you assign or of your annual turnover, and a discount charge, which works like interest on the money advanced and is calculated daily until the customer pays. Non-recourse adds a charge for credit protection, and agreements often require notice of three months or more to leave. Rates depend on the provider, your sector and your customers' credit, so compare offers on the total cost in money.
Example. You factor a £50,000 invoice on 60-day terms, assuming an 85% advance, a service fee of 1% of the invoice and a discount charge of 9% a year on the advance, rates chosen for illustration only. The factor pays you £50,000 × 85% = £42,500 upfront. If the customer pays on day 60, the discount charge is £42,500 × 9% × 60 ÷ 365 = £628.77, and with the £500 service fee the total cost is £1,128.77. That is 2.3% of the invoice, or about 16.2% a year on the money advanced.
The factor then pays you the remaining £7,500 minus £1,128.77, or £6,371.23. If the customer pays 30 days late, the discount charge rises to £42,500 × 9% × 90 ÷ 365 = £943.15 and the total cost to £1,443.15. Slow payers make factoring more expensive, and with recourse an invoice that is never paid comes back to you.
Factoring or tighter collections
Factoring brings your cash forward, but customers pay no sooner. It helps most when sales grow faster than cash or when large customers insist on long terms. When invoices are late because of errors, disputes or missing follow-up, fixing that through credit control cuts how much you need to finance.
The two are not exclusive, and with invoice discounting you keep collecting your own invoices anyway. An early payment discount is another way to bring cash forward, and you can compare its annual cost with a factoring offer.
Sunbay is not a factor and does not finance invoices. It runs collections from your ERP or accounting system, with reminders by email and SMS, AI voice calls, interest notes and demand letters, and keeps every customer reply and agreement next to the invoice. See how automated reminders and escalations work.
Frequently asked questions
What is the difference between factoring and invoice discounting?
With factoring, the factor runs your sales ledger and collects from your customers, who know about the arrangement. With invoice discounting, you keep collecting and customers usually do not know. Both advance cash against unpaid invoices.
Is invoice factoring a loan?
Legally, factoring is a sale of your invoices. In accounts prepared under IFRS, though, recourse factoring usually stays on the balance sheet, with the advance shown as a liability much like borrowing.
Can a customer stop you from factoring its invoices?
Usually not in the UK. For contracts made on or after 31 December 2018 under the law of England and Wales or Northern Ireland, a term banning the assignment of invoices has no effect, with exceptions such as when the supplier is a large enterprise, under the Business Contract Terms (Assignment of Receivables) Regulations 2018. In the US, section 9-406 of the Uniform Commercial Code makes most such terms ineffective.
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